Continental Casualty Company v. Harsha et al

Filing 64

ORDER DENYING 60 Defendant Angela Thompson's Motion to Set Aside a Clerk's Entry of Default. Signed by District Judge Terrence G. Berg. (AChu)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
CONTINENTAL CASUALTY COMPANY,
Plaintiff,
v.

Case No. 15-11943
HON. TERRENCE G. BERG
HON. DAVID R. GRAND

WILLIAM C. HARSHA, et al.
Defendants.

/

ORDER DENYING DEFENDANT ANGELA THOMPSON’S
MOTION TO SET ASIDE A CLERK’S ENTRY OF DEFAULT (DKT. 60)
This is a declaratory judgment action. On May 29, 2015, Plaintiff Continental
Casualty Company filed suit against members of a law firm and others, some 14
Defendants in all, seeking a determination that it is not liable to pay claims under a
professional liability insurance policy. (See dkt. 1.) On July 23, 2015, Plaintiff filed
its First Amended Complaint. (Dkt. 18.) The First Amended Complaint omitted
Defendant Angela Thompson, who had been named in the original complaint,
because Defendant Thompson had voluntarily filed for bankruptcy. (Id. at ¶ 20.)
Plaintiff explained in its motion that it intended to file “a motion with the
Bankruptcy Court seeking leave to further amend its complaint in this action to
rename Thompson as a defendant.” (Id.) As a result of the bankruptcy filing, the
Court entered a notice on July 28, 2015 staying all proceedings in this case against
Defendant Thompson in accordance with 11 U.S.C. § 362(a). (Dkt. 23.)

On August 3, 2015, Plaintiff was granted relief from the automatic stay in
Defendant Thompson’s bankruptcy case. (Dkt. 62-7.) In the bankruptcy court order,
the stay was lifted “for the limited purpose of allowing Continental to continue to
prosecute the declaratory judgment action styled Continental Casualty Co. v.
William C. Harsha, et al., Case No. 15‐cv‐11943 (E.D. Mich.) against debtor Angela
Thompson”. (Id. at ¶ 2.) The stay was also lifted to allow “Continental to pay ‘claim
expenses,’ as defined by the Policy, incurred by Thompson in connection with
certain third‐party liability claims asserted by former clients” of the law firm. (Id. at
¶ 3.)
On August 13, 2015, Plaintiff requested leave to file its Second Amended
Complaint “for the sole purpose of renaming Angela Thompson” as a Defendant in
this case. (Dkt. 26, p. 1.) Plaintiff also requested that all defendants be ordered to
respond to the Second Amended Complaint within 14 days of its filing. (Id. at 16.)
No defendant challenged the motion, and Plaintiff’s Second Amended Complaint
was accepted for filing on September 3, 2015. (Dkt. 28.) Defendants were also
ordered to respond within 14 days of the date of the Order. (Id. at 3.) In its order
granting Plaintiff leave to file its Second Amended Complaint, this Court explicitly
stated that “[o]n August 3, 2015, Plaintiff was granted relief from the automatic
stay in Defendant Thompson’s bankruptcy case.” (Id. at 1.)
The Second Amended Complaint renames Angela Thompson and asserts that
the bankruptcy stay imposed in her bankruptcy proceeding has been lifted “for the
limited purpose of allowing Continental to continue to prosecute this action against

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Thompson” and for Plaintiff to pay certain “claim expenses” incurred by Thompson.
(Dkt. 26-3, ¶ 107.) Defendant Thompson did not respond to the Second Amended
Complaint or otherwise appear in this action. On November 4, 2015, Plaintiff
requested a clerk’s entry of default against Defendant Thompson and two other
defendants. (Dkts. 44-46.) The defaults were entered on November 5, 2015. (Dkts.
47-49.)
For approximately six months afterward, Defendant Thompson continued to
ignore this case. During that time, those parties that did participate engaged in
complex settlement negotiations before United States Bankruptcy Court Judge
Mark Randon. (See dkt. 56.) As part of this Court’s facilitation order, a stay was
imposed in this matter prohibiting “discovery, responses to discovery, or
disclosures” and “motions, responses to motions already filed, or responsive
pleadings”. (Id. at ¶ 8.) On May 23, 2016, the parties filed a status report with the
undersigned notifying the Court that a settlement was reached in principle on
March 11, 2016 and that term sheets had been signed on May 12, 2016. (Dkt. 59, p.
1.) Accordingly, the parties requested a 45-day continuance of the stay to allow the
settlement to be finalized. (Id. at 2.) That continuance expired on July 7, 2016.
On May 31, 2016, Defendant Thompson filed a motion to set aside the clerk’s
entry of default judgment that was filed on against November 5, 2015. (Dkt. 60.) In
her motion, Defendant Thompson argues that, as a lay person, she did not
“understand or appreciate” that she was required to take any action in this case and
asserts that she has a meritorious defense. (Id. at 11-12.) Although she admits to

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receiving Plaintiff’s Second Amended Complaint renaming her as a Defendant and
alleging that the bankruptcy stay had been lifted for the explicit purpose of
pursuing this action against her, as well as this Court’s September 3, 2015 Order
stating the same, Defendant Thompson maintains that she believed these
proceedings remained stayed. (Id. at 12.) Defendant Thompson’s motion is notably
silent on the question as to whether she or her bankruptcy attorney received the
August 3, 2015 order lifting the bankruptcy stay and ordering Plaintiff to pay
certain expenses on behalf of Defendant Thompson.1 (See id.)
On June 14, 2016, Plaintiff filed a response to Defendant Thompson’s motion,
arguing that it would be significantly prejudiced if Defendant Thompson were
permitted to litigate this matter now, on the eve of settlement. (Dkt. 62, p. 14.)
Plaintiff also asserts that Defendant Thompson’s conduct is sufficiently culpable to
merit denying her motion and that she has not asserted a meritorious defense to
Plaintiff’s claims. (Id. at 9, 12.)
Plaintiff’s motion is joined by Defendants Edward Szachta and Mary Van
Hevele, who did defend themselves in this matter and who urge the Court to deny
Defendant Thompson’s motion to set aside the Clerk’s entry of default in part
because significant prejudice will result to everyone involved in the settlement.
(Dkt. 63.) Defendants Szachta and Van Hevele assert that Defendant Thompson
should not be considered a “lay person” because she “was a legal assistant or legal

At a status conference held in this matter on June 24, 2016, Defendant Thompson’s counsel, who is
not the attorney representing her in her bankruptcy proceeding, admitted that he did not know
whether she had received the order lifting the bankruptcy stay. Defendant Thompson did not file a
reply brief addressing this question.
1

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secretary for 38 years” and “the office manager at the firm” from 1999 to 2014 and
thus “very familiar with legal pleadings and papers, including summonses,
complaints, and defaults, and the consequences of a default”. (Id. at 2.) Defendant
Thompson did not file a reply brief and, pursuant to Local Rule 7.1, the time to do
so has passed; she therefore leaves these assertions unchallenged.
Defendant Thompson’s motion fails to show good cause to set aside the
default and therefore it will be DENIED.2 The decision whether to set aside an
entry of default is discretionary. Shepard Claims Serv., Inc. v. William Darrah &
Assocs., 796 F.2d 190, 193 (6th Cir.1986). A district court may set aside an entry of
default “[f]or good cause shown.” Fed. R. Civ. P. 55(c). In ruling upon a motion
seeking to set aside a clerk’s entry of default, the court must weigh whether: 1) the
other parties will be prejudiced; 2) the defaulted defendant has articulated a
meritorious defense or claim; and 3) the defaulted defendant’s culpable conduct led
to the default. Berthelsen v. Kane, 907 F.2d 617, 620 (6th Cir. 1990). The Court
undertakes this balancing test in light of this circuit’s “somewhat more lenient
standard” with respect to “Rule 55(c) motions where there has only been an entry of
default, than to Rule 60(b) motions where judgment has been entered.” Shepard
Claims Serv., 796 F.2d at 193.

The Court acknowledges that Defendant Thompson’s motion is inappropriate in light of the
discovery and motion practice stay imposed on January 26, 2016 and extended through July 7, 2016.
(See dkts. 28, 56.) Rather than strike the motion, the Court will address its merits given that
Plaintiff and two Defendants have responded, and given the potential impact of this motion on the
settlement negotiations in this matter.
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1. The Other Parties will be Significantly Prejudiced
The other parties will be significantly prejudiced if Defendant Thompson is
permitted to set aside the clerk’s entry of default. A plaintiff must point to
something more than mere delay in order to establish prejudice. Thompson v. Am.
Home Assurance Co., 95 F.3d 429, 433 (6th Cir.1996). Rather, “the delay must
result in tangible harm such as loss of evidence, increased difficulties of discovery,
or greater opportunity for fraud or collusion.” Id. at 433–34.
As a threshold matter, this case was filed over a year ago and has been
stayed since January 26, 2016 while the parties engaged in settlement discussions.
As a result, Plaintiff asserts that it has not taken any discovery in this matter
during this time or filed any of its intended motions for default judgment or for
partial judgment on the pleadings. (Dkt. 62, p. 20.) If Defendant Thompson were
able to set aside the clerk’s entry of default now, the parties would have to reinitiate
discovery after a considerable amount of time during which, according to Plaintiff,
some witnesses may no longer be available to testify at trial because they have
changed positions and employers. (Id.)
Moreover, allowing Defendant Thompson to step in at the last minute would
be highly prejudicial to all the parties that participated in the settlement
negotiations in good faith. Plaintiff asserts that, in the six months since the default
was entered against Defendant Thompson, the other parties have spent much time
engaged in complex settlement negotiations before Judge Mark Randon and
undoubtedly incurred significant legal fees. Defendants Szachta and Van Hevele

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add that, on March 11, 2016, a seven-hour settlement conference took place
involving six attorneys and a majority of the parties, including several who were
proceeding pro se.3 (Dkts. 62, p. 12; 63, p. 4.)
After the settlement conference, negotiations continued for weeks until term
sheets were drafted and signed in May 2016. (Id.) Per the term sheets, one of the
conditions for settlement is that this Court will grant Plaintiff’s yet-to-be filed
motion for default judgment against Defendant Thompson and the other defendants
who did not respond to the Second Amended Complaint (Leo Foran and David
Priehs). (Dkt. 62-10, p. 20.) Accordingly, allowing Defendant Thompson to litigate
this case now would threaten to undo the binding settlement agreement to which
the other parties have agreed. Defendant Thompson could have participated in
these negotiations, even on a pro se basis, but she chose not to do so. This factor
weighs heavily against granting Defendant Thompson’s motion.
2. Defendant Thompson States a Meritorious Defense to One Claim
Defendant Thompson has articulated a meritorious defense to one, but not to
both, of Plaintiff’s claims. In the Sixth Circuit, a defendant must state “a defense
good at law” in order to establish a meritorious defense. INVST Fin. Group, Inc. v.
Chem–Nuclear Sys., Inc., 815 F.2d 391, 398–99 (6th Cir.1987). The asserted
meritorious defense will be deemed sufficient so long as it contains “‘even a hint of a

Although Defendant Thompson did not participate in the settlement negotiations, the other parties
discussed whether to release her from liability in any final agreement. At the status conference held
in this matter on June 24, 2016, the parties that did participate in the settlement conference
confirmed that they discussed how to include Defendant Thompson in the final agreement and it was
determined that she would not be released because she was not similarly-situated to those parties
being released from liability; instead, the parties agreed to treat Thompson like Defendant Brian
Benner because some of the parties insisted that she and Defendant Benner were co-conspirators
who intentionally committed wrongdoing.
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suggestion’ which, [if] proven at trial, would constitute a complete defense.” Id. A
defendant need not demonstrate a likelihood of success on the merits. Berthelsen,
907 F.2d. at 621–22. Finally, all ambiguous or disputed facts must be resolved in
the light most favorable to the defendant. INVST Fin. Group, 815 F.2d at 398.
In the Second Amended Complaint, Plaintiff asserts two counts: (1) for a
declaration that the 2014-2015 Lawyers Professional Liability Policy is void ab
initio due to misrepresentations in the application; and (2) for a declaration that,
even if the 2014-2015 Policy were not rescinded and void ab initio, it would not
afford coverage for any of the liability claims asserted by third parties against
Defendants. (Dkt. 26-3, ¶¶ 3-4.)
In her motion, Defendant Thompson asserts that she has a meritorious
defense to these claims because “Plaintiff wrongfully failed and refused to provide a
defense and indemnification of Ms. Thompson under the insurance policies,”
resulting in a breach of the insurance policies that are the subject of this action.
(Dkt. 60, pp. 13-14.) According to Defendant Thompson, “Plaintiff never
demonstrated that the claims against Ms. Thompson were outside the scope of
coverage of the insurance policies and, wrongfully and unilaterally, ceased
providing insurance coverage to Ms. Thompson, an insured person.” (Id. at 13.)
As Plaintiff notes, however, this defense speaks only to Plaintiff’s second
claim – whether the policy in question affords coverage, as a contractual matter, for
the third-party liability claims asserted against Defendants in relation to the
suspected misappropriation of settlement funds. Defendant Thompson articulates

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no defense to Plaintiff’s first claim – that the policy was void from the beginning
because of material misrepresentations made in the application. Without a defense
to the claim that Plaintiff is entitled to rescind the policy in question, setting aside
the clerk’s entry of default against Defendant Thompson will not result in a
different outcome, even if this matter were to proceed to trial.
Accordingly, although Defendant Thompson is able to articulate a defense to
one of Plaintiff’s two claims, this second factor does not, on balance, weigh in favor
of granting Defendant Thompson’s motion.
3. Defendant Thompson Willfully Disregarded these Proceedings
There is no evidence that Defendant Thompson deliberately attempted to
thwart these proceedings, but the record supports the conclusion that Defendant
Thompson acted in a careless and inexcusable manner by not responding to the
Second Amended Complaint despite repeated notice from two courts that the
bankruptcy stay had been lifted with respect to this case and that this case was
proceeding against her.
Proceedings against Defendant Thompson were stayed in this matter when
she filed for bankruptcy. Defendant Thompson admits, however, that she received
the Second Amended Complaint and this Court’s January 26, 2016 Order granting
Plaintiff leave to file said complaint. (Dkt. 60, p. 9) Both of these documents
explicitly state that any stay previously in effect in this case has been lifted and
that this case is now proceeding against Defendant Thompson. Moreover, the
bankruptcy court’s order lifting its stay for the explicit purpose of allowing Plaintiff

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to proceed against Defendant Thompson in this court was entered three months
before the clerk’s entry of default was granted. Defendant Thompson does not deny
that she was served with this order4 or with Plaintiff’s motion for relief from the
bankruptcy stay that preceded it.
In short, Defendant Thompson had ample notice that Plaintiff was seeking
relief from the stay, was granted that relief, and had renamed her as a defendant in
this case before the clerk’s entry of default was granted. Even after the clerk’s entry
of default was granted, Defendant Thompson continued to do nothing, seemingly
acquiescing in the clerk’s entry of default. In total, Defendant Thompson allowed
the default to sit unchallenged for over six months, only stirring to action after the
other parties had hammered out a settlement which Defendant Thompson perhaps
sees as unfavorable to her.
Although Defendant Thompson is not an attorney, according to the record she
worked as a legal assistant or legal secretary in a law firm setting for
approximately 38 years. (Dkt. 63, p. 2.) For 29 years, she was Defendant Benner’s
legal assistant and served as the office manager of Defendant Benner’s law firm for
15 of those years. (Id.) Based on this experience in a law firm setting, Defendant
Thompson would appear to possess an above-average familiarity with court filings,
related legal documents, and the significance of meeting filing dates and keeping
current with the Court’s docket.

Given that the bankruptcy court’s order lifting its stay with respect to this case also orders Plaintiff
to pay certain “claim expenses” incurred by Defendant Thompson, it seem unlikely that the order
would have escaped Defendant Thompson’s notice.
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Accordingly, the Court does not give weight to Defendant Thompson’s
assertions that she simply did not understand, despite repeated notice, that the
bankruptcy stay had been lifted to allow Plaintiff to pursue this action, or that she
did not fully appreciate the consequence of having a clerk’s entry of default entered
against her. Even if the Court gave weight to these assertions, Defendant
Thompson benefitted from the assistance of counsel throughout her bankruptcy
proceedings. Her counsel would have received electronic notice of the bankruptcy
court’s order lifting the stay and would have been responsible for bringing this
important order to her attention. Defendant Thompson does not assert otherwise.
Defendant Thompson has not articulated good cause justifying her delay in
appearing in this matter. “[I]t is not necessary that conduct be excusable to qualify
for relief under the ‘good cause’ standard of Rule 55(c).” Shepard Claims Serv., 796
F.2d at 194. The Sixth Circuit has made it clear that “[t]o be treated as culpable, the
conduct of a defendant must display either an intent to thwart judicial proceedings
or a reckless disregard for the effect of its conduct on those proceedings.” Id.
While there is no evidence in the record indicating that Defendant Thompson
deliberately attempted to thwart these proceedings, there is ample proof that she
recklessly disregarded the effect her dilatory conduct would have. Defendant
Thompson willfully disregarded these proceedings after receiving repeated notice
that the bankruptcy stay had been lifted. Defendant Thompson was given due
warning that the case was proceeding against her and she had every opportunity to
litigate it. While her conduct does not rise to the level of “an intent to thwart” the

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proceedings, it is strongly suggestive of a reckless disregard for the effect her
conduct would have on the proceedings. Though this factor is less compelling than
the other two, it also weighs in favor of denying relief.
On balance, the Court finds that the circumstances in this case do not
support setting aside the clerk’s entry of default against Defendant Thompson and
allowing her to proceed on the merits at this late stage. The Court makes this
determination with the understanding that the burden Defendant Thompson must
meet is lighter than that imposed on a party seeking to set aside a default
judgment.
Accordingly, Defendant Angela Thompson’s Motion to Set Aside Clerk’s Entry
of Default (Dkt. 60) is DENIED. Moreover, given that the continuance requested by
the parties in their May 23, 2016 status report expired on July 7, 2016, the parties
are directed to file their settlement documentation. (See dkt. 59, p. 2.)
SO ORDERED.
s/Terrence G. Berg
TERRENCE G. BERG
UNITED STATES DISTRICT JUDGE
Dated: July 12, 2016
Certificate of Service
I hereby certify that this Order was electronically submitted on July 12, 2016, using
the CM/ECF system, which will send notification to each party.
By: s/A. Chubb
Case Manager

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